Question

suppose there are several paper mills producing paper for a market. these mills, located upstream from a public water supply source. figure 5 - 4 shows the paper market. use this figure to answer the following. refer to figure 5 - 4. what is the economically efficient output level?
o q2
o q2 minus q1
o q1
o q1 plus q2

Explanation:

In the presence of a negative externality like pollution from paper - mills affecting the fish population and public water supply, the economically efficient output level occurs where the marginal social cost (MSC) equals the marginal social benefit (MSB). The supply curve in the presence of negative externality is the marginal private cost (MPC) curve. When we consider the external cost, the MSC curve is to the left of the MPC curve. The intersection of the demand (which represents MSB) and the MSC curve gives the economically efficient output. In the given figure, this occurs at quantity $Q_2$.

Answer:

$Q_2$